Mining Stocks Remain Mixed With Strength In Base Metals
Mining stocks have been mixed recently, with base metals strengthening but declines in bulk commodities. RBC Capital Markets analysts believe the backdrop for bulk and base metals producers is positive, and they predict that fundamentals will remain strong for the foreseeable future.
Base metals up, bulk commodities down
Copper prices fell as exchange inventories climbed almost 9%, and speculators' net long position in copper fell to 46,300 contracts. Zinc and nickel prices increased, and stocks of both metals declined. Bulk commodities declined after Tangshan implemented new steel restrictions to curb pollution emissions.
RBC Capital Markets analysts said spring came early for copper. They increased their copper price forecast for this year from $3.50 a pound to $4 a pound. Their long-term copper price forecast rises from $3 to $3.50 a pound.
Outlook for copper and industrial metals
The RBC team believes fundamentals among copper miners are strong, setting up a tight market for the coming years. They also see the potential for sizable free cash flow generation from copper producers, which could result in multiple expansion because more money will be flowing into the sector. If there is a pullback in copper prices, the RBC team expects copper stocks to be supported due to the multi-year setup for the metal.
They also updated their outlook for industrial metals, which includes more details on the copper price and other industrial metals. The RBC team boosted their near- and medium-term price outlooks for zinc, nickel and iron ore. Following those price increases, they revised several price targets and some ratings, including Capstone Mining, which they upgraded to Outperform. The RBC team downgraded Boliden AB, Labrador Iron Ore and Central Asia Minerals to Sector Perform.
For gold, the RBC team forecasts $1,732 an ounce for this year and $1,696 an ounce for 2022. The firm's long-term outlook is $1,500 an ounce.
Mining shares are trading at a premium
Although RBC analysts believe strong fundamentals in the industry will support mining shares, they do point out that the shares are trading at a premium to the net asset value. They said mining shares are trading at a 15.8% premium at forward curve prices, although that's an improvement from the 23.1% premium they were previously trading at. Based on RBC's forecast prices, mining shares trading at a 6% premium to net asset value, although that's a vast improvement from the 32.1% premium they were trading at previously.
The RBC team advises that, on average, mining shares offer attractive entry points for investors when they are close to or below a 20% discount to their net asset value at the forward curve. Since the shares are trading at a premium at forward prices, they reflect a recovery in long-term commodity prices compared to the longest dated forward curve price, which is flat.
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